Maximizing DOD's Potential to Face New Fiscal Challenges and Strengthen Interagency Partnerships

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Maximizing DODs Potential to Face New Fiscal Challenges

and Strengthen Interagency Partnerships

By Gene L. Dodaro,Acting Comptroller General of the United States

Before the National Defense UniversityWashington, D.C.January 6, 2010

Introduction

It is a pleasure to be here this morning to participate in the National Defense Universitysspeakers program. GAO has a long-standing relationship with NDU, one that we are extremelyproud of. In fact, several of our senior executives are graduates of the National War College orthe Industrial College of the Armed Forces; they have spoken highly of their experiences.

GAOs staff includes retired military personnel, reservists, and former employees of the StateDepartment, Agency for International Development (AID) and other agencies. These individualsbring extremely valuable insight and knowledge to GAOs work.

My remarks today will focus on the Department of Defense (DOD) and the challenges it facesgiven our national governments current long term unsustainable fiscal path and ongoing U.S.commitments in Iraq and Afghanistan. DOD can take steps to better position itself for the futureand maximize the use of taxpayer dollars, particularly by improving its business operations.More broadly, I will also offer some thoughts on how the Department can work morecollaboratively with other national security agencies, such as State and AID, to build the strongpartnerships needed to adapt to the changing complexities of the national security environment.As the next generation of national security leaders, many of you will go on to assignments whereyou will be directly responsible for key decisions that will affect not only your individualagencies, but the governments collective effort to achieve national goals. My intent today is tostimulate your thinking as you prepare to assume these leadership responsibilities.

To set the context for my remarks, it is clear that the United States faces a complex and rapidlychanging national security environment, one characterized by constantly evolving threats, suchas cyber attacks on public and private institutions, and increasing global interdependence asvividly demonstrated by the recent global financial crisis and economic downturn. Even beforethe economic downturn in 2008, the United States faced growing fiscal imbalances,internationally and domestically. A widening gap between U.S. savings and consumption hasled to mounting trade deficits and a vulnerable dependence on foreign capital inflows to financeU.S. spending. In the near term, our government continues to face the challenges from thefinancial system stress and economic downturn. Over the longer-term, we face equally difficultfiscal challenges driven largely by the rising cost of health care and an aging population.

The current unsustainable long term fiscal path of our national government is going to putincreasing pressure on the entire federal budget, including the national security side.

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Consequently, there will be increasing demand and competition for resources, and policymakerswill confront difficult decisions on funding priorities.

In particular, DOD is facing a number of internal fiscal pressures as it tries to support ongoingoperations, rebuild readiness, and prepare for the future. To succeed in this era of fiscal

constraint, new ways of thinking, constructive change, and basic reforms are essential.Everything must be on the table and subject to scrutiny. This includes the stove-pipedapproaches to planning and budgeting that have typically led to a mismatch between programsand budgets. It is also time to rethink and act decisively to rectify inefficient ways of doingbusiness that undermine support for our troops on the battlefield.

Let me put this another way. DOD is second to none in warfighting capabilities. But it is a verydifferent story when it comes to issues of economy, efficiency, and accountability on theDepartments business side. DOD continues to waste billions of dollars each year that could beused to boost readiness, improve the quality of military life, and address emerging securitythreats. By taking decisive action now, DOD can avoid a range of unintended consequences and

less than optimal performance in the future.

Clearly, the federal budgets structural imbalance affects the entire national security community,not just DOD. As difficult decisions are made about national priorities, all U.S. national securityagencies will need to strike an affordable balance between investments in current missions andinvestments in new capabilities to meet future challenges. Given the complexities of the securityenvironment, they will also need to build stronger partnerships and improve their capability tocollaborate on solutions to address interrelated conventional and emerging threats that transcendthe scope and authority of any one agency.

Before getting into greater details, let me suggest some resource material you may find useful.To bring Congress and the incoming administration up to speed on major management issues,risks, and challenges, GAO launched a special transition website following the November 2008elections. We have now moved this information to a permanent spot on GAOs website thathighlights major management challenges in the federal government, including areas that weconsider to be high-risk due to their greater vulnerabilities to fraud, waste, abuse, andmismanagement or in need of broad based transformation. This site has good descriptions ofmany of the DOD-related and interagency topics reviewed by GAO. To get there, just go toGAOs home page at http://www.gao.gov and, in the upper right hand corner, click on the boxmarked GAO High Risk & Other Major Management Challenges.

Fiscal Challenges Facing the Nation and DOD

Before focusing on DOD specifically, I would like to synopsize the broader fiscal situation andoutlook for our governments finances. Weaknesses in the economy and the financial marketsand the governments response to them have contributed to a significant increase in the federaldeficit and debt. As you can see in this table, the fiscal year 2009 deficit reached a record $1.4trillion and the debt held by the public exceeded 50 percent of GDPa level not seen since 1956.

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Deficits, Debt Held by the Public andDebt Subject to Limit

$11.9

53.1%

$7.6

-10.0%

$-1.4

EstimatedActualFiscal Year2009(as of 09/30/09)

$14.1$10.0$7.9$5.7Debt subject to the limit(trillions of dollars)

66.3%40.8%37.5%33.0%Debt held by the public(percent of GDP)

$9.6$5.8$4.6$3.3Debt held by the public(trillions of dollars)

-10.4%-3.2%-2.6%1.3%Surplus (+)/ Deficit (-)(percent of GDP)

$-1.5$-0.5$-0.3$0.1Surplus (+)/ Deficit (-)(trillions of dollars)

Estimate forFiscal Year2010 fromPresidentsMidsessionReview

ActualFiscal Year2008(as of 09/30/08)



Sources: Treasury and OMB.

While the current fiscal situation has, understandably, received considerable attention, the fact isthat the federal government faces even larger financing challenges that will persist long after theeconomy recovers and financial markets stabilize. As the following graph shows, recent GAOsimulations indicate that, absent major fiscal policy changes, federal debt held by the public willincrease dramatically over the next several decades and could trend towards 200 percent of GDP.In GAOs Baseline Extended simulation, which reflects current law through 2019 and thenholds revenue and spending other than major entitlement programs constant as a share of GDP,discretionary spending is lower as a share of the economy, and revenues are higher, than the 20-

year historical average. In the Alternative simulation, which reflects historical trends andpolicy preferences, both discretionary spending and revenue as a share of the economy are nearlyat the historical averages. Let me put this into perspective. Under one scenario, in a little over10 years, debt held by the public as a share of GDP could exceed the historical high reached inthe aftermath of World War II.

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3

Debt Held by the Public as a Share of GDPUnder Two Different Fiscal Policy Simulations

0

50

100

150

200

1999 2009 2019 2029 2039 2049

Fiscal year

BaselineExtended

Historical High109 percent in 1946

Alternative

Percent of GDP

Source: GAOs Fall 2009 analysis based on the Trustees assumptions for Social Security and Medicare.

Note: The Baseline Extended simulation reflects current law through 2019 and then holds revenue and spending other than major entitlement programs constantas a share of GDP. The Alternative simulation reflects historical trends and policy preferences such as extending expiring tax provisions and holding discretionaryspending close to its historical average. Some of the increase in debt has been used to purchase financial assets as part of programs to stabilize financial marketsand stimulate the economy. The value of these financial assets has not been subtracted from the total debt held by public in our simulations.

These debt levels reflect the cumulative effect of growing deficits. While the timing of deficitsand the resulting debt buildup varies depending on the assumptions used, both simulations showthat the federal government is on an unsustainable path.

Federal Budget Surpluses and DeficitsUnder Different Fiscal Policy Simulations

-20

-15

-10

-5

0

5

1999 2009 2019 2029 2039 2049

Fiscal year

Percent of GDP

Source: GAOs Fall 2009 analysis based on the Trustees assumptions for Social Security and Medicare. We also runsimulations using CBOs projections for Social Security and Medicare. The results are not materially different.

Alternative

BaselineExtended

Surpluses

Deficits

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What drives this outlook? Primarily rising health care costs and an aging population. Assumingno changes in Medicare, Medicaid, or Social Security, spending on those programs and intereston the federal debt will account for an ever-growing share of the economy. This, in turn, willaffect the resources available for discretionary spending. If tax revenue remains near thehistorical average of about 18 percent of GDP for the next few decades, which is shown by the

line in this graph, every federal agency, including DOD, will face tighter budgets asdiscretionary spending is squeezed.

5

Potential Fiscal Outcomes Under GAOs AlternativeSimulation: Revenues and Composition of Spending

0

10

20

30

40

50

2009 2019 2030 2040Fiscal year

Net interest Social Security Medicare & Medicaid All other spending

Percent of GDP

Source: GAOs Fall 2009 analysis based on the Trustees assumptions for Social Security and Medicare.

Clearly, DOD is unique among federal agencies both because of its size and budget as well as thecomplexity of its organizational structure and mission. Not only does its budget represent a littleover half of the entire federal governments discretionary spending, the level of resourcesprovided to the Department has risen significantly over time, as the following graph shows. Forfiscal year 2010, Congress set aside about $661 billion for DOD, including about $534 billion forbase needs and about $127 billion for contingency operations. As of December 2009, DOD hasreceived about $1 trillion since 2001 to support contingency operations, including those in Iraq,Afghanistan, and elsewhere.

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DOD Budget Authority FY 2001-2010(Excluding Contingency Operations)

$289.9

$331.1

$368.5 $376.6

$513.3$534.0

$450.5$431.9

$400.9$418.5

$0

$100

$200

$300

$400

$500

$600

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10Note: bars reflect nominal dollars, line reflects constant FY10 dollars.Source: DOD.

Dollars in Billions

Notwithstanding the external pressures, the Pentagon faces its own near-term and long-terminternal fiscal pressures as it attempts to balance competing demands from within. Let me touchon four areas GAO has highlighted for the Congress and the Administration.

First, ongoing operations will continue to require substantial amounts of resources. The

magnitude of costs for operations in both Iraq and Afghanistan will depend on several factors.For example, expenses will be influenced by how the U.S.-Iraq security agreement andassociated troop redeployment plans are implemented, the nature and extent of continued U.S.military and civilian presence in Iraq, as well as decisions on the timing and composition ofadditional forces to be deployed to Afghanistan, the types of facilities needed to support troopsremaining in and around Iraq, the amount of equipment to be repaired or replaced, and the healthcare needs of returning veterans. Although drawing down troop levels in Iraq may on its surfaceappear to lower costs, previous operations in the Balkans and Kosovo suggest that costs couldactually rise in the near term.

Second, extended military operations have taken a toll on readiness and rebuilding our

force will come with a big price tag. Since 9/11, U.S. forces have operated at a high pace andgained considerable combat experience. But this high operational tempo has significantlyaffected the readiness of the force, especially in the Army and Marine Corps. Personnel aredeploying frequently and have little time to train for anything other than counterinsurgencymissions. Equipment is used repeatedly, causing wear and tear. Units that are not deployed aretransferring equipment and personnel to deploying units, causing some shortfalls. Also, the AirForce and the Navy are faced with maintaining aging aircraft and ships. Rebuilding readiness is

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a complex and costly effort, but it will be even more challenging at a time when DOD ispursuing broad-based initiatives to grow, modernize, and transform its forces and capabilities.

Third, personnel and health care costs are increasing. DODs military personnel outlayshave risen significantly since fiscal year 2000, fueled in part by increases in basic pay, housing

allowances, recruitment and retention bonuses, incentive pays and allowances, and other specialpays. Moreover, a large part of DOD's compensation-related costs is in the form of benefits anddeferred compensation, and the cost to provide benefits such as health care continue to spiralupward. In fact, expanded health care to reservists, their families, and retirees has been theprimary cost driver in growing benefits costs.

Fourth, cost growth in weapon systems programs remains a significant problem. Totalacquisition cost growth on DODs fiscal year 2008 portfolio of major programs has reachednearly $300 billion over initial estimates. The Pentagons ability to successfully adapt tobudgetary constraints will depend in great measure on its ability to better manage weapon

systems acquisition. This is a long-standing challenge at DOD. Back in 1990, GAO firstdesignated DOD's management of major weapon systems acquisitions as a high-risk area. Andalmost 20 years later, it is still on our high-risk list. The bottom line is that programs continue totake longer, cost more, and deliver fewer quantities and capabilities than originally planned.Why does this happen? It is because at the program level, programs are begun and continuedwithout enough knowledge about system requirements, technology, and design maturity.Lacking such knowledge, managers rely on assumptions that are consistently too optimistic,exposing programs to significant and unnecessary risk, and ultimately cost growth and delays.Cost overruns lead to fewer resources for other priorities and reduced buying power for DOD,and schedule delays mean that the warfighter does not get critical capabilities when needed andtherefore relies on legacy systems or goes without. Recent statements and actions by the

President, Congress, and the Secretary of Defense to bring greater attention to acquisition reformare encouraging.

Targets of Opportunities for Reform on DODs Business Side

The bottom line is that DOD can no longer afford to conduct business as usual. The military hasa proven track record in maintaining a highly capable warfighting force. Unfortunately, it hasnot achieved the same level of effectiveness on its business side. For more than a decade, DODhas dominated GAOs list of federal programs and operations at high-risk and vulnerable tofraud, waste, abuse, and mismanagement. In fact, all the DOD programs on GAOs High-RiskList relate to business operations, including systems and processes related to management ofcontracts, finances, the supply chain, and support infrastructure, in addition to weapon systemsacquisition. Inefficiencies and other long-standing weaknesses in these areas lead to challengesin supporting the warfighter, billions of dollars being wasted annually, and missed opportunitiesto free up resources for higher priority needs.

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Clearly, DODs size and complexity contribute to the challenges it faces in improving businessperformance. To the Departments credit, top management has put greater emphasis on reformin the past several years and we have seen measurable progress in some areas. It is obvious thatthis progress would not have been possible without the significant time and efforts of a highlycompetent, hardworking, and dedicated defense workforce.

With a change in administration, there is always difficulty in sustaining momentum on pastinitiatives. But a change in administration also presents important opportunities for change. Weat GAO have seen a number of indications that the environment may be right for DOD to makegreat strides.

For example, President Obama has emphasized, publicly and in directives, that the federalgovernment needs to be more transparent and that contracting reforms are neededgovernmentwide. In developing DODs fiscal year 2010 budget submission, Secretary Gatesindicated a willingness to reevaluate programs and make the hard decisions to eliminate or takeother corrective action on those that are not performing well. As a result, programs wereadjusted or terminated. In December 2008, DOD revised its acquisition policy in ways thatcould, if implemented properly, provide a foundation for developing individual acquisitionprograms with sound, knowledge-based business cases. This revision establishes early milestonereviews, requires completion of key systems engineering activities and competitive prototyping,and emphasizes preliminary design reviews prior to program initiation.

Finally, Congress passed legislation to add further discipline and accountability to the acquisitionsystem. This legislation, named the Weapon System Acquisition Reform Act of 2009, containsseveral requirements, including that DOD develop mechanisms to consider trade-offs among

cost, schedule, and performance in establishing program requirements and to certify that trade-offs have been made.

Before discussing specific ways DOD can capitalize on this renewed emphasis and take decisiveaction to achieve greater fiscal discipline, accountability, and effectiveness, let me highlightsome key elements that must be present to achieve tangible near-term results.

Clearly, sustained and focused top-level leadership and sound plans to guide transformationefforts are essential. For the first time, DOD has a Chief Management Office position,

established in law as part of the Deputy Secretary of Defenses responsibilities. As the ChiefManagement Officer, the Deputy Secretary is responsible, with assistance from the Deputy ChiefManagement Officer, for developing a strategic management plan for business operations, andintegrating efforts to transform business operations. And the military departments are alsostatutorily required to have chief management officers, business transformation offices, andbusiness transformation plans. At this point, DOD has taken some positive steps toinstitutionalize these positions and organizations, although in some cases, decision-makingauthority and relationships are not yet well defined.

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But creating positions and offices is not enough. Success will depend on how effectively thedepartment and the military departments can institutionalize these positions and organizations.This would include defining and clarifying the respective authorities, roles, and responsibilities.To do so will afford senior leaders, and those responsible for implementation such as you, theauthority and means to become advocates for transformational change.

Getting leaders and organizations in place and developing sound plans is a good start. But toachieve real reform, the Department needs to set priorities, strengthen managementaccountability, execute its plans, gauge actual progress against goals, and make adjustments asneeded. As part of GAOs broad body of defense-related work, we have routinely seen that thereis a lack of focus on developing and using interim performance measures to measure progressand the impact of actions taken. Everyone here has probably seen DOD improvement initiativesthat looked great on paper, but failed or fell to the wayside due to a lack of sustained focus.Transformation initiatives need to be set forth into measurable steps toward a long-term goal,and then interim measures used to gauge progress and adjust strategy if needed. This approach iskey to solving many of these long-standing problems.

Now let me turn to a few key areas where DOD can better tap its potential to improve businessoperations, save money, and optimize support to the warfighter.

Weapon systems acquisition management

Arguably, one of the best examples of an area where DOD could make real progress in the near-term is in improving its approach to acquiring major weapon systems. Since 2003, DODsportfolio of major defense acquisition programs has grown from 77 to 96 programs. And itsinvestment in those programs has grown from $1.2 trillion to $1.6 trillion (fiscal year 2009

dollars).1 This chart shows the change in the size and performance of DODs portfolios of majoracquisition programs.

1GAO,Defense Acquisitions: Assessments of Selected Weapon Programs, GAO-09-326SP (Washington, D.C.: Mar.30, 2009.

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7

Analysis of DOD Major DefenseAcquisition Program Portfolios

Source: GAO analysis of DOD data.

a The total acquisition cost growth for the 2007 portfolio was $295 billion in 2008 constant dollars.

The next graph indicates that over 40 percent of all the major programs in DODs fiscal year2008 portfolio are about 25 percent over budget compared to initial estimates.

8

DOD Cost Outcomes

0%

10%

20%

30%

40%

50%

Change in Total

Acquisition Costs From

First Estimates

Change in RDT&E Costs

From First Est imates

Share of programs with 25

percent cost growth

FY 2003 Portfolio FY 2007 Portfolio FY 2008 Portfolio


Percent

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Complicating matters, the average delay in delivering initial capabilities in DODs portfolio ofweapon systems programs has increased over time to 22 months, as this graph shows. DODsperformance in some of these areas is driven by older programs, as newer programs, on average,have not shown the same degree of cost and schedule growth.

9

DOD Program Schedule Outcome


18

2122

0

5

10

15

20

25

FY 2003 Portfolio FY 2007 Portfolio FY 2008 Portfolio

Average schedule delay in delivering initial capabilities

Months

Over the next 5 years, DOD expects to invest more than $357 billion on major defenseacquisition programs. To put this number into perspective, $357 billion is nearly half of whatCongress has provided to support overseas contingency operations over the past 8 years. Muchof this investment will be used to address cost overruns due to shortcomings in planning,execution, and oversight. These types of problems have plagued DODs weapon systemsportfolio for the past 30 years. We see these problems as being at odds with the very capable anddedicated people we deal with frequently in the program offices and other key organizations. So,why arent good people getting better outcomes? Based on a large body of work in this area,GAO has come to see these recurrent problems as not due primarily to mistakes, lack ofexpertise, or unforeseeable events. Rather it is the outgrowth of a system in which key processesand incentives are better at saying yes than noto programs that fail to measure up. Thechallenge is to change the dynamics of this culture.

Because of the magnitude of the investment and the current fiscal environment, DOD can nolonger afford to let cost growth go unchecked and programs inch towards completion. On apositive note, Secretary Gates has identified the need for weapon systems acquisition reform aschief among DODs institutional challenges. And our sense is that DOD is off to a good start.Last December, DOD made major revisions to its acquisition policies, which address many ofthe problems that can be traced back to the acquisition system. And, based on the WeaponSystem Acquisition Reform Act of 2009, DOD is continuing to review and revise its policies.

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The revisions, which are in line with past GAO recommendations, aim to provide keydepartment leaders with the knowledge they need to make informed decisions before a programstarts and to maintain discipline once it begins. To improve outcomes on the whole, though,DOD must ensure that these policy changes are immediately and consistently put into practiceand reflected in decision-making on individual acquisitions. It must also clearly assign

accountability to an individual or individuals for implementation.

Secretary Gates has also identified programs that should either be adjusted or terminated, basedin large part on their performance, cost-effectiveness, and ultimate value to the war fighter,which is an encouraging sign of change. But process reforms, funding cuts, and cancellations arenot enough to change organizational culture. Mission-essential programs with executablestrategies, regarding the technology, design, test, and overall cost, must win the budget battles.Tough choices will need to be made about specific weapon systems. Key stakeholdersfrom themilitary services to industry to the Congresswill have to play a constructive role in this process.

GAO has noticed progress on new programs. For example, since 2006, programs enteringsystem development have done so with higher levels of technology maturitya key indicator ofprogram success. Additionally, in our last comprehensive review of 47 major acquisitionprograms, there were a few modest indications of improvement within the portfolio from 2007 to2008, such as the fact that the total percentage of programs with 25 percent or more increases inprogram unit costs decreased by a few percentage points.

DOD still has work to do in this area; there are ample opportunities for reform and improvementthat can yield tangible results in the near-term and free up resources. For a start, DOD shouldcontinue to review existing and planned programs to

determine the right mix of programs to invest in by making better decisions as to whichprograms should be pursued or not pursued given evolving mission needs and bothexisting and expected funding,

ensure that programs are executable by matching requirements with resources andlocking in those requirements, and

make it clear that programs will then be executed based on actual knowledge and maturetechnology, and not assumptions that are often overly optimistic, and that programmanagers and senior leaders will be held responsible for expected results.

Inventory management

Improving DODs approach to inventory management is another area with ample opportunities.Reform could yield significant savings now, and free up resources for other priorities. Forexample, DOD officials have estimated that the level of investment in the department's supplychains is more than $150 billion a year, and the value of its spare part inventories has grown bytens of billions of dollars in recent years. Yet, the department continues to have substantial

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amounts of secondary inventory that are in excess to requirements. For example, in its lastreview of the Air Forces inventory, GAO reported that more than half of its secondaryinventory, valued at about $31 billion, was not needed to support required inventory levels from2002 through 2005.

More recently, in our review of the Navys secondary inventory, we found that, on average forfiscal years 2004 through 2007, about $11 billion, or around 60 percent, of the total annualinventory value of $18.7 billion was needed to meet current requirements, but $7.5 billion, orabout 40 percent, exceeded current requirements. The graph explains, by fiscal year, the dollaramount of inventory that met and exceeded current requirements.

10

Navy Secondary Inventory Meeting andExceeding Current Requirements

(Fiscal Years 2004-2007)

Source: GAO analysis of Navy data.

The Army is also retaining too much inventory that is not needed to meet requirements. Ourreview of the Armys secondary inventory showed that, on average, about $12.7 billion, or about78 percent, of the total annual inventory value of $16.3 billion was needed to meet currentrequirements, whereas $3.6 billion, or around 22 percent, exceeded current requirements.2

Similar to the Navy, this graph illustrates the Armys trend of retaining excess inventory hasremained relatively stable from fiscal years 2004 through 2007.

2Our analysis included secondary inventory from the U.S. Army Aviation and Missile Lifecycle and ManagementCommand and the U.S. Army TACOM Life Cycle Management Command, but did not include the ArmysCommunication and Electronics Command because the information system used to manage secondary inventorywas not able to provide item-specific data for the period of our review.

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11

Army Secondary Inventory Meeting andExceeding Current Requirements,

(Fiscal Years 2004-2007)

Source: GAO analysis of Army data

Note: Values are expressed in constant fiscal year 2007 dollars. Analysis includes AMCOM- and TACOM-managed items.

A major cause for the accumulation in excess inventories is weaknesses in the military servicesapproach to forecasting demand as well as a lack of metrics and targets focusing on the costefficiency of inventory management. More effective processes that identify and manageacquisition lead times are of critical importance to maintaining cost-effective inventories,budgeting, and having materiel available when it is needed. Overestimates and underestimatesof acquisition lead time contribute to inefficient use of funds and potential shortages or excesses

of spare parts.

The Department can strengthen the accountability and management of its secondary inventory bychanging inventory management policies and practices that contribute to excess inventories Forexample, we have recommended that the services evaluate why they experience decreases indemand for supplies, which contribute to having excess inventories; determine what actions areneeded to better forecast demand; and take steps to implement these actions. Furthermore, wehave made recommendations to develop performance goals and metrics to assess and track thecost efficiency of the services inventory management practices and to provide for a greateroversight role to the service chief management officers for improving inventory management.

Lastly, DOD needs to implement effective processes to identify or manage acquisition lead timesin order to maintain cost-effective inventories, budget wisely, and have materiel available whenneeded. Taking steps such as these to transform the way in which DOD manages its supplychain and inventory supplies will result in better mission-essential support to the warfighter andwill free up resources wasted or tied up in unneeded spare parts for higher priority needs.

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DOD has generally concurred with our recommended actions and has taken some steps toimprove inventory management. For example, the Air Force has made some needed policychanges, and the Army has directed that more up-to-date operational information be provided toinventory managers so they can make more informed purchase decisions. Furthermore, weunderstand that the Office of the Secretary of Defense has initiated a study to develop options for

improving demand forecasting of spare parts.

Recently, the Congress has also shown increased interest in reforming DODs inventorymanagement practices. For example, the House, as part of its report accompanying the fiscalyear 2010 National Defense Authorization Act, encouraged DOD to improve its ability toforecast demand by adopting an advanced modeling and simulation methodology thatincorporates factors influencing demand, such as time, usage, aging of parts, origin of criticalparts, and maintenance, and logistics support. Similarly, the conference report accompanying theAct called for DOD to submit a comprehensive plan for improving its overall inventorymanagement practices, from improving demand forecasting to reducing current excess inventorystocks.

Contract management

DODs management of contracts for goods and services, and the use of contractors in general, isanother area that needs greater scrutiny and offers potential for saving money. Unfortunately,DODs contracts have not always led to the desired outcomes and it is not always clear that DODhas been using sound business practices to acquire goods and services. On a positive note, theSecretary of Defense and other senior leaders have acknowledged these weaknesses and the needfor reform, which has begun to prompt action within the Department.

Taking deliberate action now is critical because DOD has become reliant on contractors to meetcritical missions, including those related to ongoing operations, and to support acquisitionfunctions. For example, DOD reported that, as of the second quarter of 2009, over 200,000contractor personnel were working in Iraq and Afghanistan.3 To put the level of contractingactivity into perspective, between fiscal years 2001 and 2008, DOD obligations on contractswhen measured in real terms have more than doubled to over $387 billion in total, and to morethan $200 billion just for services. At the same time, DODs acquisition workforce, responsiblefor contract management, has not similarly grown. In fact, during that same time period, DODscontracting career field grew by only about 1 percent. The graph below clearly illustrates theproblemthat the size of the contracting workforce has not kept pace with level of contractingactivity.

3GAO, Contingency Contracting: DOD, State, and USAID Continue to Face Challenges in Tracking ContractorPersonnel and Contracts in Iraq and Afghanistan, GAO-10-1 (Washington, D.C.: Oct. 1, 2009).

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12

Changes in DODs Contract Obligations andContracting Workforce,

Fiscal Years 2001 through 2008

Source: GAO analysis, Federal Procurement Data System-Next Generation, DOD.

To its credit, DOD has issued guidance to address contracting weaknesses and encourage the useof sound business arrangements. For example, consistent with congressional direction andGAOs recommendations, DOD established a process for reviewing major services acquisitions;issued regulations to better manage its use of contracting arrangements that can pose additionalrisks for the government, including time-and-materials contracts and undefinitized contractingactions; and has efforts under way to identify and improve the skills and capabilities of itsworkforce. For example, in November 2008 we reported that DOD has been developing,revising, and finalizing new joint policies and guidance on the departments use of contractors tosupport deployed forces and has begun developing training programs for personnel that do notwork in the acquisition field to provide information necessary to operate effectively oncontingency contracting matters and work with contractors on the battlefield. 4

But there is still a lot to be done. GAO has recommended that DOD (1) assess the risks that itsincreasing reliance on contractors poses, (2) determine the appropriate mix of contractor,civilian, and military personnel in shaping its total force for the future, including the role and use

of contractors to support deployed forces, and (3) ensure that it maintains an acquisitionworkforce that is adequately sized, trained, and equipped, so that it can effectively plan,negotiate, award, and manage the range of contracts needed to meet the department's needs.

5In

4GAO, Contract Management: DOD Developed Draft Guidance for Operational Contract Support but Has Not MetAll Legislative Requirements, GAO-09-114R (Washington, D.C.: Nov. 20, 2008).5GAO,Defense Acquisitions: Fundamental Changes Are Needed to Improve Weapon Program Outcomes, GAO-08-1159T (Washington, D.C.: Sept. 25, 2008) and GAO, A Knowledge-Based Funding Approach Could Improve MajorWeapon System Program Outcomes, GAO-08-619 (Washington, D.C.: July 2, 2008).

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addition, because DOD has paid billions in award and incentive fees to contractors regardless ofacquisition outcomes, GAO has also recommended ways that DOD can continue to strengthenthe link between contractor monetary incentives, such as award and incentive fees, andacquisition outcomes, which has started to show positive returns. Lastly, we believe DODshould continue to focus attention on higher risk contracting strategies, such as the use of time-

and-materials contracts and undefinitized contract actions, to ensure effective management ofthese approaches. Such efforts would also be consistent with recent direction from theAdministration to reduce the use of high risk contracting strategies.

These critical contracting reforms, if successfully implemented, should strengthen the credibilityof DODs contracting processes. This will not only help ensure that that desired outcomes areachieved, but will also enhance the return on the significant investments of taxpayer dollars forthe contracting of goods and services.

Financial management

DOD must have more reliable financial information to help achieve needed reforms. WhileDOD represents a big share of the federal budget, it is one of the few federal entities that cannotaccurately account for its spending or assets. It is one of only 3 entities in the entire governmentthat cannot pass the test of an independent audit. Without accurate financial information, DODis severely hampered in its ability to make sound budgetary and programmatic decisions, monitortrends, make adjustments to improve performance, and reduce operating costs or maximize theuse of resources.

Since the first financial statement audit was attempted at DOD nearly 20 years ago, GAO hasconsistently called for actions to address weaknesses in DOD financial management. 6 DOD haslaunched several reform efforts over the years, but these have met with little success. Continuedfinancial management and related deficiencies hinder DODs ability to control costs, ensurebasic accountability, anticipate future costs and claims on the budget, measure performance, andmaintain control over funds. Problems with asset accountability further complicate criticalfunctions, such as supporting the current plans to withdraw troops and equipment from Iraq.

DODs new comptroller hopes to increase the programs chances for success by improvingbudgetary information and asset accountability. As shown in this slide, the emphasis will be ontwo areas. First, strengthening information and processes supporting the DepartmentsStatements of Budgetary Resources. Second, verifying the existence and completeness ofmission critical assets, from weapons systems to real property to general equipment.

6GAO,Defense Business Transformation: A Full-time Chief Management Officer with a Term Appointment IsNeeded at DOD to Maintain Continuity of Effort and Achieve Sustainable Success, GAO-08-132T (Washington,D.C.: Oct, 16, 2007).

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Current Focus of DODs FinancialManagement Efforts

Improve budgetary information and asset availability

Strengthen information and processes, and achieve anauditable Statement of Budgetary Resources

Verify the existence and completeness of mission criticalassets

Components must ensure records accurately capturethe number of each type of weapon system, realproperty, inventory, and operating materials andsupplies

Budgetary and asset-accountability information is widely used by DOD managers at all levels, soits reliability is vital to daily operations and management. The Marine Corps has just begun anaudit of its fiscal year 2010 Statement of Budgetary Resources, and DOD is treating this as a testcase. If the Marine Corps audit is successful, it will be used as a model for the other services.

We and the comptroller agree that DODs current financial management priorities are necessaryand critical to improving accountability and information for operations. When it comes to assets,DOD certainly needs to provide accountability over the existence and completeness of thoseitems. GAO believes it may be worthwhile to revisit the question of how DOD reports assets inits financial statements because the traditional financial reporting model was not designed toaddress the unique aspects of military assets.

DOD components are developing detailed plans to support efforts to improve financialmanagement in budgetary reporting and related operational processes and accountability forasset existence and completion. Based on what we have seen of the plan so far, we believe this

prioritization is a reasonable approach for now. A consistent focus may increase theDepartments ability to show incremental progress toward achieving auditability in the shortterm. In response to GAOs recommendations, the department has also put in place a process toimprove standardization and comparability across components. The success of this process willdepend on top management support, as well as high-quality planning and effectiveimplementation at all levels.

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Overall, we are encouraged by DODs renewed attempt to improve its financial management andachieve accountability for its expenses and assets. GAO will continue to monitor progressandprovide feedback on the statusof those efforts. Among other things, we will seek to determinethe reasonableness of efforts to achieve stated objectives and identify any gaps in strategicplanning and coordination among the components. We will also track the progress of DODs

remediation plans for the remaining financial management areas. At some point down the road, Iexpect GAO and others will become involved in discussions about how DOD should berecording assets for financial statement purposes.

Financial management improvement efforts are pivotal to achieving broader businesstransformation goals. Accurate, timely, and useful financial management information is essentialfor sound management analysis, decision making, and reporting.

Opportunities for Strengthening Interagency Collaboration

DOD and other national security agencies can and must work more collaboratively together tostrengthen the interagency process and advance U.S. national security efforts. The NationalDefense University plays in significant role in strengthening interagency partnerships in thenational security community. In bringing agency personnel together through its variousprograms and events, the University offers a valuable forum for the national security communityto network and build relationships, as well as to learn more about the organizational structures,processes, and other aspects of their respective agencies.

As the events of September 11, 2001, and other terrorist attacks have made clear, the challengesto national security have expanded significantly beyond the traditional state-based threats of the

Cold War era to unconventional threats from nonstate actors. The new threats are diffuse andambiguous and include terrorist threats from extremist groups, cyber attacks, drug trafficking,infectious diseases, and energy threats. They arise from multiple sources and are interrelated,which makes it difficult, if not impossible, for any single agency to effectively address themalone. In that sense, effective collaboration among multiple agencies and across federal, state,and local governments as well as with internal partners is critical.

Not only have the threats evolved, but so have the agencies involved in national security issues.Beyond the traditional agencies of the Departments of Defense and State, and the U.S. Agencyfor International Development, the Departments of Homeland Security, Energy, Justice, the

Treasury, Agriculture, Commerce, and Health and Human Services are now a bigger part of theequation. What has not yet evolved are the mechanisms that agencies use to coordinate nationalsecurity activitiessuch as developing overarching strategies to guide planning and execution ofmissions, or sharing and integrating national security information across agencies. In theabsence of effective mechanisms, collaboration suffers, and in some cases, can be a hindrance toachieving national security objectives.

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It is encouraging that Congress is focused on this topic and has recently taken steps to strengtheninteragency collaboration for national security issues. For example, in the fiscal year 2008National Defense Authorization Act, Congress directed the Secretary of Defense to submit a planto improve and reform DODs participation in and contribution to the interagency coordinationprocess on national security issues. Similarly, in the fiscal year 2009 National Defense

Authorization Act, Congress gave authority to the Secretaries of Defense and State and theAdministrator of AID to jointly establish an advisory panel to advise, review, and makerecommendations on ways to improve coordination among the agencies on national securityissues, including reviewing their respective roles and responsibilities.

Based on GAOs work, along with others, we have identified a number of challenges that hinderthe ability of agencies to improve coordination mechanisms and work collaboratively inresponding to national security issues.

7As the following graphic shows, we have highlighted

four specific areas for the Congress and administration, including some thoughts on actions thatagencies can take to enhance collaboration.

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Opportunities for StrengtheningInteragency Collaboration

Developing and implementing overarching,integrated strategies to achieve national securityobjectives

Formalizing coordination mechanisms to overcome

organizational differences

Developing a well-trained workforce

Sharing and integrating national security informationacross agencies

First, developing and implementing overarching, integrated strategies. Leadership andstrategic direction is required as the foundation for collaboration. Defining organizational roles

and responsibilities and mechanisms for coordination can help agencies clarify who will lead orparticipate in which activities and how decisions will be made. It can also help them organizetheir individual and joint efforts, and address how conflicts would be resolved. Although someU.S. agencies have developed or updated overarching strategies on national security-relatedissues, GAOs work has identified some cases where U.S. efforts have been hindered by the lack

7 GAO,Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies,Organizations, Workforce, and Information Sharing, GAO-09-904SP (Washington, D.C.: Sept. 25, 2009).

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of information on roles and responsibilities of organizations involved or the lack of mechanismsto coordinate their efforts. For example, since 2005, multiple U.S. agencies, including the StateDepartment, AID, and DOD, led separate efforts to improve the capacity of Iraqs ministries togovern, without overarching direction from a lead entity to integrate their efforts. Since thattime, we have testified and reported that the lack of an overarching strategy contributed to U.S.

efforts not meeting the goal for key Iraqi ministries to develop the capacity to effectively governand assume increasing responsibility for operating, maintaining, and further investing inreconstruction projects.8

Second, formalizing coordination mechanisms to overcome organizational differences.

Agencies have different organizational structures, planning processes, and funding sources toplan for and conduct their national security activities, which can hinder interagencycollaboration. This can result in a patchwork of activities that waste scarce funds and limit theoverall effectiveness of federal efforts. For example, agencies involved in national securityactivities define and organize their regions differently. A good example involves DODsregional combatant commands and the State Departments regional bureaus which are aligned

differently in terms of the geographic areas they cover. As a result of differing structures andareas of coverage, coordination becomes more challenging and the potential for gaps andoverlaps in policy implementation is greater. Moreover, funding for national security activitiesis budgeted for and appropriated by agency, rather than by functional area (such as nationalsecurity), resulting in budget requests and congressional appropriations that tend to reflectindividual agency concerns.

Given the differences among agencies, developing adequate coordination mechanisms is criticalto achieving integrated approaches. While, in some cases, agencies have established effectivemechanisms, in others, challenges remain. For example, DOD has taken some steps to involveother agencies in its strategic planning processes. As we reported in February 2009, DODs U.S.Africa Command was one of the first combatant commands to employ DODs new planningapproach, which called for collaboration among federal agencies to ensure activities areintegrated and synchronized in pursuit of common goals. More specifically, in developing itstheater campaign plan, the command met with 16 agencies at the beginning of its planningprocess to gain interagency input on its plan. While the process has yet to mature, we believeinvolving other agencies at the beginning may result in a better informed plan for DODsactivities in Africa.

We have also seen instances in which mechanisms are not formalized or fully utilized. Forexample, we found that collaboration between DODs Northern Command and an interagencyplanning team on the development of the commands homeland defense plan was largely basedon the dedicated personalities involved and informal meetings. Without formalizing andinstitutionalizing the interagency planning structure, we concluded efforts to coordinate may notcontinue when personnel move on to their next assignments.

8 GAO,Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies,Organizations, Workforce, and Information Sharing, GAO-09-904SP (Washington, D.C.: Sept. 25, 2009).

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Third, developing a well-trained workforce. Collaborative approaches to national securityrequire a well-trained workforce with the right number of people with the right skills andexperience to integrate the governments diverse capabilities and resources, but some federalgovernment agencies lack the personnel capacity to fully participate in interagency activities.Moreover, some agencies do not have the necessary capabilities to support their national security

roles and responsibilities. For example, we reported that, as of September 2009, 31 percent ofStates generalist and specialists in language-designated positions did not meet the languagerequirements for their position, an increase from 29 percent in 2005. Also, agencies personnelsystems do not always provide positive incentives because interagency assignments are often notconsidered to be career enhancing or recognized in performance management systems. Varioustools can be useful in helping agencies to improve their ability to more fully participate incollaboration activities. For example, increasing training opportunities can help personneldevelop the skills and understanding of other agencies capabilities. The National DefenseUniversity plays an important role and makes a valuable contribution in this area. Also,focusing on strategic workforce planning can support agencies efforts to secure the personnelresources needed to collaborate in interagency missions.

Finally, sharing and integrating national security information across agencies. Informationis a crucial tool in national security and its timely dissemination is critical for maintainingnational security. More than 8 years after 9/11, federal, state, and local governments and private-sector partners are making progress in sharing terrorism-related information. For example, wereported in October 2007 that most states and many local governments had established fusioncenterscollaborative efforts to detect, prevent, investigate, and respond to criminal and terroristactivityto address gaps in information sharing. However, agencies do not always share relevantinformation with their national security partners due to a lack of clear guidelines for sharinginformation and security clearance issues. For example, GAO found that non-DOD personnelcould not access some DOD planning documents or participate in planning sessions because theymay not have had the proper security clearances. Moreover, because of concerns about agenciesability to protect shared information or use that information properly, other agencies andprivate-sector partners are sometimes hesitant to share information. For example, we have reported thatDepartment of Homeland Security officials expressed concerns about sharing terrorism-relatedinformation with state and local partners because such information had occasionally been postedon public Internet sites or otherwise compromised. To facilitate information sharing, it isimportant to establish clear guidelines, agreements, and procedures that govern key aspects, suchas how information will be communicated, who will participate in interagency informationsharing efforts, and how information will be protected.

Concluding Remarks

In closing, I want to reiterate that DOD has a real opportunity in the days ahead to set a newcourse for the future, take concrete steps to correct long-standing problems, and achievemeaningful results that can better position the Department to respond to changing economicconditions and future threats. Given our nations growing fiscal and other challenges, theDepartment cannot afford to delay addressing inefficiencies in its business operations and freeing

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up resources for higher priorities. The old ways of doing business, without enough attention tocost or outcome, are truly unsustainable.

In many areas, DOD has untapped potential to achieve tangible and sustainable outcomes thatwill ultimately provide better support to the warfighter. Success will require strong leadershipthat sets the tone, takes decisive action, and assumes accountability for results. Success will alsodepend on sound plans that set clear priorities and measurable goals as well as results-orientedperformance measures that can be used to gauge progress and make adjustments. Truly, DODwill need to approach the transformation of its business operations with the same level ofintensity as it plans and carries out its military operations. And all of the national securityagencies will need to make concerted efforts to forge strong and collaborative partnerships, andseek coordinated solutions that leverage the expertise and capabilities across the community.This too will take committed and effective leadership from all levels of an organization toovercome the many barriers to working across agency boundaries. Without people willing tomake it happen, transformation and integration is just talk. There are countless ways that each ofyou, as future leaders, can make a real difference in how DOD does business, and in how theinteragency process works.

It has been a pleasure to speak to you today. I wish you the best in your future endeavors.

Maximizing DOD's Potential to Face New Fiscal Challenges and Strengthen Interagency Partnerships

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